Jefferson County Deal to Avert Bankruptcy Hinges on Legislature

Sept. 17 (Bloomberg) -- Jefferson County, Alabama, which
approved a deal with holders of $3.14 billion of its sewer debt,
now needs action by state lawmakers to end a more than three-year saga that kept it on the brink of filing the biggest
municipal bankruptcy in U.S. history.

The County Commission voted 4-1 yesterday to accept the
terms of the agreement, which includes $1.1 billion in
concessions from creditors. JPMorgan Chase & Co., which arranged
most of the debt, would take the biggest loss. The terms also
call for three annual sewer-rate increases of as much as 8.2
percent, followed by annual boosts of no more than 3.25 percent.

“It’s time for resolution of this lingering debacle,”
said Commissioner Joe Knight, who voted for the settlement.
“There is enough blame to go around.”

The threat of bankruptcy has loomed over Jefferson County,
home to Birmingham and more than 658,000 residents, since 2008
as officials sought to keep sewer fees from ballooning to pay
off the debt. Commission President David Carrington said
bankruptcy is still possible if final terms aren’t agreed on.
The commission will negotiate with creditors to reach a
definitive agreement over the next 30 to 45 days, he said.

Concluding the accord hinges on Governor Robert Bentley’s
ability to persuade the Legislature to create an independent
sewer authority to issue new debt backed by a so-called moral
obligation pledge from the state. Lawmakers also will be asked
to shore up the county’s general fund, which is facing a
$40 million gap in its operating budget, after a state court
struck down a levy on wages. The governor has said he would call
a special session to act on an agreement.

‘Lot Left’

“There is a lot left to do to make the settlement work,”
Bentley said in a statement. “I look forward to continuing to
work with county commissioners and legislators in preparation
for a special session of the Alabama Legislature so that we can
pass laws necessary to move forward with the settlement and to
address the county’s general fund budget issues.”

If legislators accept the arrangement and the new bonds are
marketed successfully, it would end the biggest debt crisis in
the $2.9 trillion municipal bond market.

“If Jefferson County had to file for bankruptcy, there’s
no telling how far the ripples would have stretched across the
market,” said Matthew Buscone, a portfolio manager at
Breckinridge Capital Advisors in Boston, which oversees $12
billion in assets. “A negative story like that could have
caused individuals to redeem their mutual-fund shares, which
would have had a negative effect far beyond Jefferson County.”

Harrisburg Cited

Jefferson County’s agreement, coupled with Harrisburg,
Pennsylvania’s move to avoid default on its general obligation
bonds this week, shows that most fiscally distressed local
governments are taking pains to avoid bankruptcy, Buscone said.

On Sept. 15, an investor bought more than $1 million of the
county’s auction-rate securities for 64.75 cents on the dollar,
according to data compiled by Bloomberg. In July, the same debt
traded for 61.5 cents, and the next day it traded at 74.5 cents.

Jefferson would have been the sixth municipal issuer to
enter bankruptcy this year and the biggest since 1994, when
California’s Orange County sought protection from creditors
after losing $1.7 billion on interest-rate bets.

On Aug. 1, Central Falls, Rhode Island, filed a Chapter 9
bankruptcy petition, citing pension obligations it can’t afford.
A filing by Jefferson County would have been the 625th municipal
bankruptcy since 1937, according to data compiled by Jim
Spiotto, a partner at Chapman & Cutler in Chicago.

Origins of Crisis

“We are encouraged by the county’s decision to refinance
the sewer debt and look forward to working toward a successful
resolution in the coming months,” said Justin Perras, a
spokesman for JPMorgan in New York.

The bank would provide $750 million of the concessions
under the settlement proposal, Knight said in an interview two
days ago.

Jefferson’s crisis erupted in early 2008 when investors
dumped floating-rate bonds used to refinance its fixed-rate
sewer debt after companies that insured them lost their top
credit ratings because of investments in subprime mortgages.

Jefferson’s floating-rate securities were coupled with
interest-rate swaps, a money-saving strategy pitched by banks
that backfired. As credit markets convulsed, the county’s
interest costs soared. When banks demanded early payoffs of the
bonds, the county defaulted.

Rife With Corruption

The county’s bond deals were rife with political corruption
that caused the cost of the sewer project to soar as it was
built during the 1990s. Democrat Larry Langford, a former County
Commission president and Birmingham mayor, was convicted of
accepting bribes in connection with the financing.

Two former JPMorgan bankers are fighting U.S. Securities
and Exchange Commission charges that they gave $8 million in
undisclosed payments to friends of commissioners to secure the
bank’s role in the deals. In 2009, JPMorgan agreed to a $722
million settlement with the SEC.

The settlement in Birmingham followed weeks of negotiations
with creditors involving concessions and how much the county
would increase sewer rates. County commissioners scheduled
special meetings on July 28, Aug. 4 and Aug. 12 in which
bankruptcy was on the agenda, only to say that talks with
creditors were continuing.

Sticking Point

The size of sewer-rate increases became a sticking point
because the residents who use the system have no other choice
and can ill-afford higher costs, according to Commissioner
George Bowman, who represents one of the two poorest districts
in the county and voted against the agreement.

Almost 70 percent of sewer users are in the two districts
with the lowest average incomes, he said. The county’s sewer
rates have increased more than four-fold since 1997.

“I recognize the need for additional revenue,” Bowman
said yesterday. “But they are balancing that debt on the backs
of the poor.”

Jefferson County’s sewer system serves about 478,000 people
through 144,000 accounts, according to a June report from John
Young, the court-appointed receiver who runs the system and
helped broker the settlement. The county’s median household
income is $43,312 a year, U.S. Census Bureau figures show. The
comparable figure in Birmingham was $31,704 in 2009, according
to the latest census data available.

Bill Assistance

The average residential wastewater bill of $37.74 will
increase $3.10 in the first year, Carrington said. The tentative
settlement calls for the county to set up a bill-assistance
program for low-income residents.

“I don’t see how anybody can afford more sewer rate
increases,” said Charles Bigham, 54, an unemployed truck
driver, in an interview. “It would be better to file bankruptcy
and be able to start with a clean slate.”

Under the proposed deal, the county would refinance $2.05
billion to repay old debt. To ease commissioners’ concerns about
the transfer of the sewer system’s assets to a new authority,
the county would get the assets back after the refinancing debt
is repaid. The authority would be prohibited from selling or
transferring sewer assets without the county’s approval.

The governor’s willingness to help the county avoid
bankruptcy by enhancing the creditworthiness of new sewer bonds
was critical to the deal, Young said.

Financing Costs

If the Legislature backs Jefferson’s debt, the county’s
financing costs may be lowered by as much as 2 percentage points
for an estimated savings of more than $1 billion, Young said.

The refinancing costs may be lowered further if Jefferson
chooses to purchase as much $1 billion of bond insurance from
Assured Guaranty. Debt guaranteed by Assured would carry a AA+
rating.

The so-called moral-obligation pledge to support the debt
is a nonbinding promise from the state to cover any revenue gap.
State legislation would include a provision requiring Jefferson
to pay back Alabama if it comes to the county’s aid.

For the three years, Jefferson made little progress in
negotiations with creditors.

A turning point came when Bentley, a Republican who took
office in January, said he would do everything in his power to
help the county avoid bankruptcy. The governor said a Jefferson
bankruptcy might increase borrowing costs for the state and its
municipalities and hurt Alabama’s image.